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CHAPTER 4 INCOME STATEMENT AND RELATED INFORMATION CHAPTER LEARNING OBJECTIVES 1.

Understand the uses and limitations of an income statement.

2.

Understand the content and format of the income statement.

3.

Prepare an income statement.

4.

Explain how to report items in the income statement.

5.

Identify where to report earnings per share information.

6.

Explain intraperiod tax allocation.

7.

Understand the reporting of accounting changes and errors.

8.

Prepare a retained earnings statement.

9.

Explain how to report other comprehensive income.

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Test Bank to accompany Intermediate Accounting: IFRS Edition

TRUE-FALSE—Conceptual 1. The income statement is useful for helping to assess the risk or uncertainty of achieving future cash flows. 2. A strength of the income statement as compared to the statement of financial position is that items that cannot be measured reliably can be reported in the income statement. 3. Earnings management generally makes income statement information more useful for predicting future earnings and cash flows. 4. The transaction approach of income measurement focuses on the income-related activities that have occurred during the period. 5. Income from operations represents a company’s results before any gain or loss on discontinued operations. 6. Both revenues and gains increase both net income and equity. 7. Companies frequently report income tax as the last item before net income on the income statement. 8. The income statement presents subtotals for gross profit, income before continuing operations, income before income tax, and net income. 9. The nature-of-expense method identifies the major cost drivers and helps users to assess whether these amounts are appropriate for the revenue generated. 10. Income before income taxes is computed by deducting interest expense from income from operations. 11. The IASB takes the position that both revenues and expenses and other income and expense should be reported as part of income from operations. 12. Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations. 13. Discontinued operations and gains and losses are both reported net of tax in the income statement. 14. A company that reports a discontinued operation has the option of reporting per share amounts for this item. 15. Intraperiod tax allocation relates the income tax expense of the period to the specific items that give rise to the amount of the tax provision. 16. A company recognizes a change in estimate by making a retrospective adjustment to the financial statements. 17. Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.

Income Statement and Related Information

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18. Companies only restrict retained earnings to comply with contractual requirements or current necessity. 19. Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners. 20. Comprehensive income can be reported in a statement of changes in equity.

True False Answers—Conceptual Item 1. 2. 3. 4. 5.

Ans. T F F T F

Item 6. 7. 8. 9. 10.

Ans. T T F F T

Item 11. 12. 13. 14. 15.

Ans. T T F F T

Item 16. 17. 18. 19. 20.

Ans. F T F F T

MULTIPLE CHOICE—Conceptual

S

21.

The major elements of the income statement are a. revenue, cost of goods sold, selling expenses, and general expense. b. operating section, nonoperating section, discontinued operations and cumulative effect. c. revenues, expenses, gains, and losses. d. All of these.

22.

Information in the income statement helps users to a. evaluate the past performance of the enterprise. b. provide a basis for predicting future performance. c. help assess the risk or uncertainty of achieving future cash flows. d. All of these.

23.

Limitations of the income statement include all of the following except a. items that cannot be measured reliably are not reported. b. only actual amounts are reported in determining net income. c. income measurement involves judgment. d. income numbers are affected by the accounting methods employed.

24.

Which of the following would represent the least likely use of an income statement prepared for a business enterprise? a. Use by customers to determine a company's ability to provide needed goods and services. b. Use by labor unions to examine earnings closely as a basis for salary discussions. c. Use by government agencies to formulate tax and economic policy. d. Use by investors interested in the financial position of the entity.

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Test Bank to accompany Intermediate Accounting: IFRS Edition

25.

The income statement reveals a. resources and equities of a firm at a point in time. b. resources and equities of a firm for a period of time. c. net earnings (net income) of a firm at a point in time. d. net earnings (net income) of a firm for a period of time.

26.

The income statement information would help in which of the following tasks? a. Evaluate the liquidity of a company. b. Evaluate the solvency of a company. c. Estimate future cash flows. d. Estimate future financial flexibility.

27.

Which of the following is an example of managing earnings down? a. Changing estimated bad debts from 3 percent to 2.5 percent of sales. b. Revising the estimated life of equipment from 10 years to 8 years. c. Not writing off obsolete inventory. d. Reducing research and development expenditures.

28.

Which of the following is an example of managing earnings up? a. Decreasing estimated salvage value of equipment. b. Writing off obsolete inventory. c. Underestimating warranty claims. d. Accruing a contingent liability for an ongoing lawsuit.

29.

What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income? a. Increase research and development activities. b. Relax credit policies for customers. c. Delay shipments to customers until after the end of the fiscal year. d. Delay purchases from suppliers until after the end of the fiscal year.

30.

What might a manager do during the last quarter of a fiscal year if she wanted to decrease current annual net income? a. Delay shipments to customers until after the end of the fiscal year. b. Relax credit policies for customers. c. Pay suppliers all amounts owed. d. Delay purchases from suppliers until after the end of the fiscal year.

31.

The income statement provides investors and creditors information that helps them predict a. the amounts of future cash flows. b. the timing of future cash flows. c. the uncertainty of future cash flows. d. All of these answers are correct.

32.

Investors and creditors use income statement information for each of the following except to a. evaluate the future performance of the company. b. provide a basis for predicting future performance. c. help assess the risk and uncertainty of achieving future cash flows. d. All of these answers are correct.

Income Statement and Related Information

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33.

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings is the definition of a. quality of earnings. b. earnings management. c. smoothing of earnings. d. earnings averaging.

34.

Which of the following situations involving different accounting methods or accounting estimates results in comparison difficulties between companies? a. Estimated useful lives for depreciable assets. b. Inventory methods. c. Estimates of bad debts. d. All of the above.

35.

Which method of income measurement is used in the preparation of the income statement? a. Capital maintenance approach. b. Transaction approach. c. Cash-flow approach. d. Income components approach.

36.

Which of the following equations expresses the definition of “income”? a. Income = Revenues – Expenses b. Income = (Revenues + Gains) – (Expenses + Losses) c. Income = Revenues + Gains d. Income = Gains – Losses

37.

Which of the following is not required to be presented on the income statement under IFRS? a. Revenue. b. Other gains/losses. c. Finance costs. d. Tax expense.

38.

The non-controlling interest section of the income statement is shown a. below net income. b. below income from operations. c. above other income and expenses. d. above income tax.

39.

The definition of expenses includes a. losses only. b. expenses and losses. c. expenses only. d. expenses, losses and unrealized losses on available-for-sale securities.

4-6 40.

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Test Bank to accompany Intermediate Accounting: IFRS Edition IFRS requires that a single amount be disclosed within the income statement for a. the post-tax profit/loss on discontinued operations and the pre-tax gain/loss disposal of discontinued operational assets. b. the pre-tax profit/loss on discontinued operations and the post-tax gain/loss disposal of discontinued operational assets. c. the pre-tax profit/loss on discontinued operations and the pre-tax gain/loss disposal of discontinued operational assets. d. the post-tax profit/loss on discontinued operations and the post-tax gain/loss disposal of discontinued operational assets.

on the on the on the on the

41.

Which of the following is not a generally practiced method of presenting the income statement? a. Including prior period adjustments in determining net income. b. The condensed income statement. c. The consolidated income statement. d. Including gains and losses from discontinued operations of a component of a business in determining net income.

42.

The occurrence which most likely would have no effect on 2015 net income (assuming that all amounts involved are material) is the a. sale in 2015 of an office building contributed by a stockholder in 1987. b. collection in 2015 of a receivable from a customer whose account was written off in 2014 by a charge to the allowance account. c. settlement based on litigation in 2015 of previously unrecognized damages from a serious accident which occurred in 2013. d. worthlessness determined in 2015 of stock purchased on a speculative basis in 2011.

43.

The occurrence that most likely would have no effect on 2015 net income is the a. sale in 2015 of an office building contributed by a stockholder in 1966. b. collection in 2015 of a dividend from an investment. c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance. d. stock purchased in 2001 deemed worthless in 2015.

P

44. Which of the following is not a selling expense? a. Advertising expense. b. Office salaries expense. c. Freight-out. d. Store supplies consumed.

P

45.

The accountant for the Lintz Sales Company is preparing the income statement for 2015 and the statement of financial position at December 31, 2015. The January 1, 2015, merchandise inventory balance will appear a. only as an asset on the statement of financial position. b. only in the cost of goods sold section of the income statement. c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the statement of financial position. d. as an addition in the cost of goods sold section of the income statement and as a current asset on the statement of financial position.

Income Statement and Related Information

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46.

In which section of the income statement is interest expense reported? a. Gross profit. b. Income from operations. c. Income before income taxes. d. Non-controlling interest.

47.

If a company prepares a consolidated income statement, IFRS requires that net income be reported for a. the majority interest only. b. the minority interest only. c. both the majority interest and the minority interest. d. as a single amount only.

48.

Earnings per share relate to a. preference shares only. b. ordinary shares only. c. both preference and ordinary shares. d. neither preference nor ordinary shares.

49.

Undeclared dividends are deducted from net income in the earnings per share computation for which type of preference shares? a. Non-cumulative only. b. Cumulative only. c. Neither non-cumulative nor cumulative. d. Both non-cumulative and cumulative.

50.

The earnings per share computation is not required for a. Net income. b. Gain on disposal of discontinued operation, net of tax. c. Income from continuing operations. d. Income from operations.

51.

Given the following income statement line items: Income from operations Income before income taxes Income from continuing operations Income from discontinued operations Net income How many earnings per share amounts are required to be disclosed? a. 5 b. 4 c. 3 d. 2

52.

Which of the following earnings per share figures must be disclosed on the face of the income statement? a. EPS for income before taxes. b. The effect on EPS from unusual items. c. EPS for gross profit. d. EPS for income from continuing operations.

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Test Bank to accompany Intermediate Accounting: IFRS Edition

53.

Earnings per share should always be shown separately for a. net income and gross profit. b. net income and pretax income. c. income from continuing operations. d. discontinued operations and prior period adjustments.

54.

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business? a. The gain or loss on disposal should be reported as an other income item. b. Results of operations of a discontinued component should be disclosed immediately below income from operations. c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement. d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

55.

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as a. a prior period adjustment. b. an other income and expense item. c. an amount after continuing operations and before net income. d. a bulk sale of plant assets included in income from continuing operations.

56.

Gains or losses on the disposal of investments should be shown in the income statement a. b. c. d.

Net of Tax No Yes No Yes

Disclosed Separately No Yes Yes No

57.

Income taxes are allocated to a. continuing operations. b. discontinued operations. c. prior period adjustments. d. All of these answers are correct.

58.

Which of the following is true about intraperiod tax allocation? a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. b. It is required for the cumulative effect of accounting changes but not for prior period adjustments. c. Its purpose is to allocate income tax expense evenly over a number of accounting periods. d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.

Income Statement and Related Information

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59.

Companies use intraperiod tax allocation for all of the following items except a. discontinued operations. b. prior period adjustments. c. changes in accounting estimates. d. income from continuing operations.

60.

A change in accounting principle requires what kind of adjustment to the financial statements? a. Current period adjustment. b. Prospective adjustment. c. Retrospective adjustment. d. Current and prospective adjustment.

61.

A change in accounting principle requires that the cumulative effect of the change for prior periods be shown as an adjustment to a. beginning retained earnings for the earliest period presented. b. net income for the period in which the change occurred. c. comprehensive income for the earliest period presented. d. stockholders’ equity for the period in which the change occurred.

62.

Changes in estimates affect reported amounts a. retrospectively only. b. prospectively only. c. currently and prospectively. d. currently and retrospectively.

63.

Prior years income statements are not restated for a. changes in accounting principle. b. changes in estimates. c. corrections of errors. d. All of these answer choices are correct.

64.

In 2015, Milford Corporation determined that it overstated salaries payable and salaries expense by $20,000 in 2014. In 2015, which of the following accounts will have to be credited to correct this error? a. Salaries and Wages Payable. b. Salaries and Wages Expense. c. Retained Earnings. d. Income Summary.

65.

Which of the following does not appear on a statement of retained earnings? a. Net loss. b. Prior period adjustments. c. Preference share dividends. d. Other comprehensive income.

66.

Which of the following would appear first in a statement of retained earnings? a. Net income. b. Prior period adjustment. c. Cash dividends. d. Share dividends.

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67.

Test Bank to accompany Intermediate Accounting: IFRS Edition A correction of an error in prior periods' income will be reported a. b. c. d.

In the income statement Yes No Yes No

Net of tax Yes No No Yes

68.

Which of the following items will not appear in the retained earnings statement? a. Net loss. b. Prior period adjustment. c. Discontinued operations. d. Dividends.

69.

Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as a. an increase in depreciation expense for the year in which the error is discovered. b. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements. c. an other expense item for the year in which the error was made. d. a prior period adjustment.

70.

Which of the following is included in comprehensive income? a. Investments by owners. b. Unrealized gains on non-trading equity securities. c. Distributions to owners. d. Changes in accounting principles.

71.

Which of the following is not an acceptable way of displaying the components of other comprehensive income? a. Combined statement of retained earnings. b. Second income statement. c. Combined statement of comprehensive income. d. All of the above are acceptable.

72.

Comprehensive income includes all of the following except a. dividend revenue. b. losses on disposal of assets. c. investments by owners. d. unrealized holding gains.

73.

Comprehensive income includes all of the following, except a. revenues and gains. b. expenses and losses. c. preference share dividends. d. unrealized gains and losses on non-trading equity securities.

Income Statement and Related Information 74.

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Under IFRS other comprehensive income must be displayed (reported) in a. the equity section of the statement of financial position. b. a second income statement. c. the comprehensive income statement or the income statement and comprehensive income statement. d. the retained earnings the statement.

Multiple Choice Answers—Conceptual Item

Ans.

21. 22. 23. 24. 25. 26. 27. 28.

c d b d d c b c

Item

29. 30. 31. 32. 33. 34. 35. 36.

Ans.

b a d a b d b c

Item

37. 38. 39. 40. 41. 42. 43. 44.

Ans.

b a b d a b c b

Item

45. 46. 47. 48. 49. 50. 51. 52.

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

b c c b b d c d

53. 54. 55. 56. 57. 58. 59. 60.

c c c c d d c c

61. 62. 63. 64. 65. 66. 67. 68.

a c b c d b d c

69. 70. 71. 72. 73. 74.

d b a c c b

MULTIPLE CHOICE—Computational 75.

Ortiz Co. had the following account balances: Sales revenue $ 120,000 Cost of goods sold 60,000 Salaries and wages expense 10,000 Depreciation expense 20,000 Dividend revenue 4,000 Utilities expense 8,000 Rent revenue 25,000 Interest expense 12,000 Sales returns 11,000 Advertising expense 13,000 What amount would Ortiz report as other income and expense in its income statement? a. b. c. d.

$29,000 $17,000 $25,000 $13,000

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Test Bank to accompany Intermediate Accounting: IFRS Edition Ortiz Co. had the following account balances: Sales revenue $ 180,000 Cost of goods sold 90,000 Salaries and wages expense 15,000 Depreciation expense 30,000 Dividend revenue 6,000 Utilities expense 12,000 Rent revenue 30,000 Interest expense 18,000 Sales returns 16,500 Advertising expense 19,500 What amount would Ortiz report as income from operations in its income statement? a. b. c. d.

77.

$73,500 $45,000 $33,000 $15,000

For Mortenson Company, the following information is available: Cost of goods sold Sales discounts Income tax expense Operating expenses Sales revenue

$240,000 8,000 24,000 92,000 400,000

In Mortenson’s income statement, gross profit a. should not be reported. b. should be reported at $36,000. c. should be reported at $152,000. d. should be reported at $160,000. 78.

For Rondelli Company, the following information is available: Cost of goods sold Sales returns and allowances Income tax expense Operating expenses Sales revenue

$270,000 12,000 27,000 105,000 450,000

In Rondelli's income statement, gross profit a. should not be reported. b. should be reported at $36,000. c. should be reported at $168,000. d. should be reported at $180,000. 79.

Gross billings for merchandise sold by Lang Company to its customers last year amounted to $13,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were a. $13,720,000. b. $13,350,000. c. $13,175,000. d. $13,035,000.

Income Statement and Related Information 80.

Use the following information (in thousands): Service Revenue ¥1,600,000 Income from continuing operations 200,000 Net Income 180,000 Income from operations 440,000 Selling & administrative expenses 1,000,000 Income before income tax 400,000 Determine the amount of other income and expense. a. ¥40,000 b. ¥160,000 c. ¥200,000 d. ¥20,000

81.

Use the following information (in thousands): Service Revenue ¥1,600,000 Income from continuing operations 200,000 Net Income 180,000 Income from operations 440,000 Selling & administrative expenses 1,000,000 Income before income tax 400,000 Determine the amount of financing costs. a. ¥40,000 b. ¥20,000 c. ¥200,000 d. ¥160,000

82.

Use the following information (in thousands): Service Revenue ¥1,600,000 Income from continuing operations 200,000 Net Income 180,000 Income from operations 440,000 Selling & administrative expenses 1,000,000 Income before income tax 400,000 Determine the amount of income tax. a. ¥40,000 b. ¥20,000 c. ¥200,000 d. ¥160,000

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4 - 14 83.

Test Bank to accompany Intermediate Accounting: IFRS Edition Use the following information (in thousands): Revenues ¥1,600,000 Income from continuing operations 200,000 Net Income 180,000 Income from operations 440,000 Selling & administrative expenses 1,000,000 Income before income tax 400,000 Determine the amount of discontinued operations. a. ¥(40,000) b. ¥160,000 c. ¥200,000 d. ¥(20,000)

84.

Use the following information (in thousands): Sales revenue Gain on sale of equipment Cost of goods sold Interest expense Selling & administrative expenses Income tax rate

¥300,000 90,000 164,000 16,000 30,000 30%

Determine the amount of income from operations. a. ¥76,000 b. ¥196,000 c. ¥60,000 d. ¥180,000 85.

Use the following information (in thousands): Sales revenue Gain on sale of equipment Cost of goods sold Interest expense Selling & administrative expenses Income tax rate

¥300,000 90,000 164,000 16,000 30,000 30%

Determine the amount of income before taxes. a. ¥76,000 b. ¥196,000 c. ¥60,000 d. ¥180,000

Income Statement and Related Information 86.

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Use the following information (in thousands): Sales revenue Gain on sale of equipment Cost of goods sold Interest expense Selling & administrative expenses Income tax rate

¥300,000 90,000 164,000 16,000 30,000 30%

Determine the amount of income taxes. a. ¥8,000 b. ¥18,000 c. ¥27,000 d. ¥54,000 87.

Use the following information (in thousands): Sales revenue Gain on sale of equipment Cost of goods sold Interest expense Selling & administrative expenses Income tax rate

¥300,000 90,000 164,000 16,000 30,000 30%

Determine the amount of net income. a. ¥126,000 b. ¥21,000 c. ¥42,000 d. ¥63,000 88.

Majors Corporation had income from continuing operations of $1,800,000 in 2015. During 2015 it disposed of its repair division at a pre-tax gain of $27,000. Prior to disposal, the division operated at a pre-tax loss of $45,000. The tax rate was 30%. What is the net income for 2015? a. $1,782,000 b. $1,728,000 c. $1,749,600 d. $1,787,400

89.

Manning Company has the following items: write-down of inventories, $240,000; loss on disposal of part of Sports Division, $370,000; and loss on restructurings, $226,000. Ignoring income taxes, what total amount should Manning Company report as other income and expense? a. $836,000 b. $370,000 c. $466,000 d. $596,000

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Test Bank to accompany Intermediate Accounting: IFRS Edition

90.

Garwood Company has the following items: write-down of inventories, $480,000; loss on disposal of part of Sports Division, $740,000; and loss due to an asset impairment, $452,000. Ignoring income taxes, what total amount should Garwood Company report as other income and expense? a. $1,672,000 b. $740,000 c. $932,000 d. $1,192,000

91.

At Ruth Company, events and transactions during 2015 included the following. The tax rate for all items is 30%. (1) Depreciation for 2013 was found to be understated by $45,000. (2) A litigation settlement resulted in a loss of $37,500. (3) The inventory at December 31, 2013 was overstated by $60,000. (4) The company disposed of its recreational division at a loss of $750,000. The effect of these events and transactions on 2015 income from continuing operations net of tax would be a. $26,250. b. $57,750. c. $99,750. d. $624,750.

92.

At Ruth Company, events and transactions during 2015 included the following. The tax rate for all items is 30%. (1) Depreciation for 2013 was found to be understated by $45,000. (2) A litigation settlement resulted in a loss of $37,500. (3) The inventory at December 31, 2013 was overstated by $60,000. (4) The company disposed of its recreational division at a loss of $750,000. The effect of these events and transactions on 2015 net income net of tax would be a. $26,250. b. $551,250. c. $582,750. d. $624,750.

93.

During 2015, Lopez Corporation disposed of Pine Division, a major component of its business. Lopez realized a gain of $1,500,000, net of taxes, on the sale of Pine's assets. Pine's operating losses, net of taxes, were $1,800,000 in 2015. How should these facts be reported in Lopez's income statement for 2015?

a. b. c. d.

Total Amount to be Included in Income from Results of Continuing Operations Discontinued Operations $1,800,000 loss $1,500,000 gain 300,000 loss 0 0 300,000 loss 1,500,000 gain 1,800,000 loss

Income Statement and Related Information 94.

In 2015, Esther Corporation reported net income of $1,000,000. It declared and paid preference dividends of $250,000 and ordinary share dividends of $100,000. During 2015, Esther had a weighted average of 250,000 ordinary shares outstanding. Compute Esther's 2015 earnings per share. a. b. c. d.

95.

$1.50 $1.75 $2.25 $2.50

In 2015, Benfer Corporation reported net income of $350,000. It declared and paid ordinary share dividends of $40,000 and had a weighted average of 100,000 ordinary shares outstanding. Compute the earnings per share to the nearest cent. a. b. c. d.

97.

$2.60 $3.00 $4.00 $5.00

In 2015, Linz Corporation reported a discontinued operations loss of $1,000,000, net of tax. It declared and paid preference dividends of $100,000 and ordinary share dividends of $300,000. During 2015, Linz had a weighted average of 400,000 ordinary shares outstanding. Compute the effect of the discontinued operations loss, net of tax, on earnings per share. a. b. c. d.

96.

$3.10 $2.45 $3.15 $3.50

Benedict Corporation reports the following information: Net income Dividends on ordinary shares Dividends on preference shares Weighted average ordinary shares outstanding

$500,000 140,000 60,000 125,000

Benedict should report earnings per share of a. $2.40. b. $2.88. c. $3.52. d. $4.00. 98.

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Norling Corporation reports the following information: Net income Dividends on ordinary shares Dividends on preference shares Weighted average ordinary shares outstanding Norling should report earnings per share of a. $1.20. b. $1.44. c. $1.76. d. $2.00.

$500,000 140,000 60,000 250,000

4 - 18 99.

Test Bank to accompany Intermediate Accounting: IFRS Edition In 2015, Timmons Company reported net income of £1,000,000. It declared and paid preference share dividends of £100,000 and ordinary share dividends of £125,000. During 2015, Timmons had a weighted average of 150,000 ordinary shares outstanding. The 2015 earning per share for Timmons Company is:. a. b. c. d.

100.

£6.67 £6.00 £5.83 £5.17

Given the following: Net income EPS Dividend/ordinary shares Weighted average ordinary shares outstanding

$800,000 4.25 2.00 160,000

Determine the amount of the preference share dividend. a. $480,000 b. $320,000 c. $160,000 d. $120,000 101.

Use the following information: Gross profit Loss on sale of investments Interest expense Gain on sale of discontinued operations Income tax rate

₤3,900,000 10,000 7,500 30,000 20%

Compute the amount of income tax applicable to continuing operations. a. ₤776,500 b. ₤820,000 c. ₤784,500 d. ₤784,000 102.

Use the following information: Gross profit Loss on sale of investments Interest expense Gain on sale of discontinued operations Income tax rate

₤3,900,000 10,000 7,500 30,000 20%

Compute the amount of discontinued operations to be combined with income from continuing operations on the income statement. a. ₤30,000 b. ₤24,000 c. ₤6,000 d. None of the above.

Income Statement and Related Information 103.

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Use the following information: Gross profit Loss on sale of investments Interest expense Gain on sale of discontinued operations Income tax rate

₤3,900,000 10,000 7,500 30,000 20%

Compute the total amount of income tax expense experienced by the company. a. ₤765,000 b. ₤800,000 c. ₤782,500 d. ₤1,005,000 104.

Sandstrom Corporation has a discontinued operations loss of $100,000, an unusual gain of $70,000, and a tax rate of 40%. At what amount should Sandstrom report each item? a. b. c. d.

105.

Unusual gain $70,000 42,000 70,000 42,000

Prophet Corporation has a discontinued operations loss of $300,000, an unusual gain of $210,000, and a tax rate of 40%. At what amount should Prophet report each item? a. b. c. d.

106.

Discontinued loss $(100,000) (100,000) (60,000) (60,000)

Discontinued loss $(300,000) (300,000) (180,000) (180,000)

Unusual gain $210,000 126,000 210,000 126,000

Arreaga Corp. has a tax rate of 40 percent and income before non-operating items of $262,000. It also has the following items (gross amounts). Unusual loss Discontinued operations loss Gain on disposal of equipment Change in accounting principle increasing prior year's income

$ 37,000 101,000 8,000 53,000

What is the amount of income tax expense Arreaga would report on its income statement? a. $104,800 b. $93,200 c. $111,200 d. $74,000

4 - 20 107.

Test Bank to accompany Intermediate Accounting: IFRS Edition Palomo Corp has a tax rate of 30 percent and income before considering the items below of $377,000. It also has the following items (gross amounts). Unusual gain Loss from discontinued operations Dividend revenue Income increasing prior period adjustment

$ 23,000 183,000 6,000 74,000

What is the amount of income tax Palomo would report on its income statement? a. $121,800 b. $ 66,900 c. $ 89,100 d. $114,900 108.

Lantos Company had a 40 percent tax rate. Given the following pre-tax amounts, what would be the income tax expense reported on the face of the income statement? Sales revenue $ 110,000 Cost of goods sold 60,000 Salaries and wages expense 8,000 Depreciation expense 11,000 Dividend revenue 9,000 Utilities expense 1,000 Loss from discontinued operations 10,000 Interest expense 2,000 a. b. c. d.

109.

$14,800 $10,800 $11,200 $ 7,200

Moorman Corporation reports the following information: Correction of understatement of depreciation expense in prior years, net of tax $ 430,000 Dividends declared, 2015 320,000 Net income for 2015 1,000,000 Retained earnings, 1/1/15, as reported 2,500,000 Moorman should report retained earnings, January 1, 2015, as adjusted at a. $2,070,000. b. $2,500,000. c. $2,930,000. d. $3,610,000.

Income Statement and Related Information 110.

Moorman Corporation reports the following information: Correction of understatement of depreciation expense in prior years, net of tax $ 430,000 Dividends declared, 2015 320,000 Net income for 2015 1,000,000 Retained earnings, 1/1/15, as reported 2,500,000 Moorman should report retained earnings, December 31, 2015, of a. $2,070,000. b. $2,750,000. c. $3,180,000. d. $3,610,000.

111.

Leonard Corporation reports the following information: Correction of overstatement of depreciation expense in prior years, net of tax $ 215,000 Dividends declared, 2015 160,000 Net income for 2015 500,000 Retained earnings, 1/1/15, as reported 1,200,000 Leonard should report retained earnings, January 1, 2015, as adjusted at a. $985,000. b. $1,200,000. c. $1,415,000. d. $1,755,000.

112.

Leonard Corporation reports the following information: Correction of overstatement of depreciation expense in prior years, net of tax $ 215,000 Dividends declared, 2015 160,000 Net income for 2015 500,000 Retained earnings, 1/1/15, as reported 1,200,000 Leonard should report retained earnings, December 31, 2015, at a. $985,000. b. $1,325,000. c. $1,540,000. d. $1,755,000.

4 - 21

4 - 22 113.

Test Bank to accompany Intermediate Accounting: IFRS Edition The following information was extracted from the accounts of Essex Corporation at December 31, 2015: CR(DR) Total reported income since incorporation $1,900,000 Total cash dividends paid (800,000) Unrealized holding loss (120,000) Total share dividends distributed (200,000) Prior period adjustment, recorded January 1, 2015 75,000 What should be the balance of retained earnings at December 31, 2015? a. $855,000 b. $900,000 c. $780,000 d. $975,000

114.

Pullman Corporation had retained earnings of $2,100,000 at January 1, 2015. During the year the company experienced a net loss of $900,000 and declared cash dividends of $240,000. Determine the retained earnings balance at December 31, 2015. a. b. c. d.

115.

Pullman Corporation had retained earnings of $2,100,000 at January 1, 2015. During the year the company experienced a net loss of $900,000 and declared cash dividends of $240,000. It was discovered in 2015 that $150,000 of repair expense was debited to the Land account in 2014. The income tax rate is 20%. Determine the retained earnings balance at December 31, 2015. a. b. c. d.

116.

$2,760,000 $1,200,000 $3,000,000 $960,000

$810,000 $1,080,000 $1,050,000 $840,000

Rodriquez Corporation had retained earnings of $850,000 at January 1, 2015. During the year the company generated a net income of $150,000 and declared share dividends of $50,000. It was discovered during 2015 that $40,000 of closing costs on a 2014 purchase of land was debited to Maintenance Expense. The income tax rate is 30%. Determine the retained earnings balance at December 31, 2015. a. b. c. d.

$978,000 $960,000 $910,000 $938,000

Income Statement and Related Information 117.

4 - 23

On January 1, 2015, Zhang Inc. had cash and share capital of ¥10,000,000. At that date, the company had no other asset, liability, or equity balances. On January 5, 2015, it purchased for cash ¥6,000,000 of equity securities that it classified as non-trading. It received cash dividends of ¥800,000 during the year on these securities. In addition, it has an unrealized loss on these securities of ¥600,000. The tax rate is 20%. Compute the amount of net income/(loss). a. b. c. d.

118.

¥800,000 ¥640,000 ¥(200,000) ¥160,000

On January 1, 2015, Zhang Inc. had cash and share capital of ¥10,000,000. At that date, the company had no other asset, liability, or equity balances. On January 5, 2015, it purchased for cash ¥6,000,000 of equity securities that it classified as non-trading. It received cash dividends of ¥800,000 during the year on these securities. In addition, it has an unrealized loss on these securities of ¥600,000. The tax rate is 20%. Compute the amount of comprehensive income. a. b. c. d.

119.

¥200,000 ¥160,000 ¥640,000 ¥600,000

On January 1, 2015, Zhang Inc. had cash and share capital of ¥10,000,000. At that date, the company had no other asset, liability, or equity balances. On January 5, 2015, it purchased for cash ¥6,000,000 of equity securities that it classified as non-trading. It received cash dividends of ¥800,000 during the year on these securities. In addition, it has an unrealized loss on these securities of ¥600,000. The tax rate is 20%. Compute the amount of other comprehensive income/(loss). a. b. c. d.

120.

¥(480,000) ¥(600,000) ¥200,000 ¥160,000

On January 1, 2015, Zhang Inc. had cash and share capital of ¥10,000,000. At that date, the company had no other asset, liability, or equity balances. On January 5, 2015, it purchased for cash ¥6,000,000 of equity securities that it classified as non-trading. It received cash dividends of ¥800,000 during the year on these securities. In addition, it has an unrealized loss on these securities of ¥600,000. The tax rate is 20%. Compute the amount of accumulated other comprehensive income/(loss). a. b. c. d.

¥(600,000) ¥200,000 ¥160,000 (¥480,000)

4 - 24 121.

Test Bank to accompany Intermediate Accounting: IFRS Edition Madsen Company reported the following information for 2015: Sales revenue Cost of goods sold Operating expenses Unrealized holding gain on available-for-sale securities Cash dividends received on the securities

$510,000 350,000 55,000 30,000 2,000

For 2015, Madsen would report other comprehensive income of a. $137,000. b. $135,000. c. $32,000. d. $30,000. 122.

Korte Company reported the following information for 2015: Sales revenue Cost of goods sold Operating expenses Unrealized holding gain on available-for-sale securities Cash dividends received on the securities

$500,000 350,000 55,000 25,000 2,000

For 2015, Korte would report comprehensive income of a. $122,000. b. $120,000. c. $97,000. d. $25,000. 123.

For the year ended December 31, 2015, Transformers Inc. reported the following: Net income Preference dividends declared Ordinary share dividends declared Unrealized holding loss, net of tax Retained earnings Share capital – ordinary Accumulated other comprehensive income, Beginning balance

$120,000 20,000 4,000 2,000 160,000 80,000 10,000

What would Transformers report as its ending balance of Accumulated Other Comprehensive Income? a. b. c. d.

$12,000 $10,000 $8,000 $2,000

Income Statement and Related Information 124.

For the year ended December 31, 2015, Transformers Inc. reported the following: Net income Preference dividends declared Ordinary share dividends declared Unrealized holding loss, net of tax Retained earnings, beginning balance Share capital – ordinary Accumulated other comprehensive income, Beginning balance

$120,000 20,000 4,000 2,000 160,000 80,000 10,000

What would Transformers report as the ending balance of Retained Earnings? a. b. c. d. 125.

$278,000 $266,000 $256,000 $254,000

For the year ended December 31, 2015, Transformers Inc. reported the following: Net income Preference dividends declared Ordinary share dividends declared Unrealized holding loss, net of tax Retained earnings, beginning balance Share capital – ordinary Accumulated other comprehensive income, Beginning balance

$120,000 20,000 4,000 2,000 160,000 80,000 10,000

What would Transformers report as total stockholders' equity? a. b. c. d.

$344,000 $336,000 $256,000 $240,000

Multiple Choice Answers—Computational Item

75. 76. 77. 78. 79. 80. 81. 82. 83.

Ans.

a c c c c b a c d

Item

84. 85. 86. 87. 88. 89. 90. 91. 92.

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

b d d a d a a a b

93. 94. 95. 96. 97. 98. 99. 100. 101

c b d d c c b d a

102. 103. 104. 105. 106. 107. 108. 109. 110.

b c c c b a a a b

111. 112. 113. 114. 115. 116. 117. 118. 119.

c d d d d a b b a

120. 121. 122. 123. 124. 125.

d d a c c a

4 - 25

4 - 26

Test Bank to accompany Intermediate Accounting: IFRS Edition

MULTIPLE CHOICE—CPA Adapted 126.

Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2015, included the following expense accounts: Accounting and legal fees Advertising Freight-out Interest Loss on sale of long-term investments Officers' salaries Rent for office space Sales salaries and commissions

$140,000 100,000 75,000 60,000 30,000 170,000 180,000 110,000

One-half of the rented premises is occupied by the sales department. How much of the expenses listed above should be included in Perry's selling expenses for 2015? a. $210,000 b. $285,000 c. $300,000 d. $375,000 127.

Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2015, included the following expense accounts: Accounting and legal fees Advertising Freight-out Interest Loss on sale of long-term investments Officers' salaries Rent for office space Sales salaries and commissions

$140,000 100,000 75,000 60,000 30,000 170,000 180,000 110,000

One-half of the rented premises is occupied by the sales department. How much of the expenses listed above should be included in Perry's general and administrative expenses for 2015? a. $400,000 b. $430,000 c. $460,000 d. $490,000

Income Statement and Related Information 128.

4 - 27

Didde Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2015 included the following expense and loss accounts: Accounting and legal fees Advertising Freight-out Interest Loss on sale of long-term investment Officers' salaries Rent for office space Sales salaries and commissions

$140,000 160,000 80,000 70,000 30,000 225,000 220,000 170,000

One-half of the rented premises is occupied by the sales department. Didde's total selling expenses for 2015 are a. $520,000. b. $440,000. c. $410,000. d. $350,000. 129.

The following items were among those that were reported on Dye Co.'s income statement for the year ended December 31, 2015: Legal and audit fees $150,000 Rent for office space 180,000 Interest on bank loan 210,000 Loss on abandoned equipment used in operations 35,000 The office space is used equally by Dye's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Dye's income statement? a. $240,000 b. $275,000 c. $330,000 d. $450,000

4 - 28 130.

Test Bank to accompany Intermediate Accounting: IFRS Edition Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2015 included the following: Debit Credit Sales revenue $140,000 Cost of sales $ 60,000 Administrative expenses 25,000 Loss on sale of equipment 9,000 Commissions to salespersons 8,000 Interest revenue 5,000 Freight-out 3,000 Loss on disposition of wholesale division 17,000 Bad debt expense 3,000 Totals $125,000 $145,000 Other information: Logan's income tax rate is 30%. Merchandise inventory: January 1, 2015 $80,000 December 31, 2015 70,000 On Logan's income statement for 2015, merchandise purchases are a. $73,000. b. $70,000. c. $53,000. d. $50,000.

131.

Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2015 included the following: Debit Credit Sales revenue $140,000 Cost of sales $ 60,000 Administrative expenses 25,000 Loss on sale of equipment 9,000 Commissions to salespersons 8,000 Interest revenue 5,000 Freight-out 3,000 Loss on disposition of wholesale division 17,000 Bad debt expense 3,000 Totals $125,000 $145,000 Other information: Logan's income tax rate is 30%. Merchandise inventory: January 1, 2015 $80,000 December 31, 2015 70,000 On Logan's income statement for 2015, income from continuing operations is a. $54,000. b. $20,000. c. $37,000. d. $32,000.

Income Statement and Related Information 132.

4 - 29

Logan Corp.'s trial balance of income statement accounts for the year ended December 31, 2015 included the following: Debit Credit Sales revenue $140,000 Cost of sales $ 60,000 Administrative expenses 25,000 Loss on sale of equipment 9,000 Commissions to salespersons 8,000 Interest revenue 5,000 Freight-out 3,000 Loss on disposition of wholesale division 17,000 Bad debt expense 3,000 Totals $125,000 $145,000 Other information: Logan's income tax rate is 30%. Merchandise inventory: January 1, 2015 $80,000 December 31, 2015 70,000 On Logan's income statement for 2015, discontinued operations loss is a. $11,900. b. $17,000. c. $18,200. d. $26,000.

133.

Chase Corp. had the following infrequent transactions during 2015: A $300,000 gain from selling its automotive division. A $420,000 gain on the sale of investments. A $140,000 loss on the write-down of inventories. In its 2015 income statement, what amount should Chase report as other income and expense? a. $160,000 b. $280,000 c. $580,000 d. $720,000

134.

James, Inc. incurred the following infrequent losses during 2015: A $105,000 impairment loss on intangible assets. A $60,000 litigation settlement (loss). A $90,000 write-off of obsolete inventory. In its 2015 income statement, what amount should James report as other income and expense? a. $255,000 b. $195,000 c. $165,000 d. $150,000

4 - 30 135.

Test Bank to accompany Intermediate Accounting: IFRS Edition Which of the following should be reported as a prior period adjustment? Change in Estimated Lives of Depreciable Assets a. Yes b. No c. Yes d. No

Change from Unaccepted Principle to Accepted Principle Yes Yes No No

Multiple Choice Answers—CPA Adapted Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

126. 127.

d a

128. 129.

a a

130. 131.

d c

132. 133.

a b

134. 135.

a b

DERIVATIONS — Computational No. Answer

Derivation

75.

a

$25,000 + $4,000 = $29,000.

76

c

$51,000 - $12,000 + $30,000 - $16,500 - $19,500 = $33,000.

77.

c

$400,000 – $8,000 - $240,000 = $152,000.

78.

c

$450,000 – $12,000 - $270,000 = $168,000.

79.

c

$13,720,000 – $370,000 – $175,000 = $13,175,000.

80.

b

¥1,600,000 – ¥1,000,000 – 440,000 = ¥160,000.

81.

a

¥440,000 – ¥400,000 = ¥40,000.

82.

c

¥400,000 – ¥200,000 = ¥200,000.

83.

d

¥200,000 – ¥180,000 = ¥(20,000)

84.

b

¥300,000 – ¥164,000 – ¥30,000 + ¥90,000 = ¥196,000.

85.

d

¥300,000 – ¥164,000 – ¥30,000 + ¥90,000 – ¥16,000 = ¥180,000.

86.

d

¥300,000 – ¥164,000 – ¥30,000 + ¥90,000 – ¥16,000 = ¥180,000; ¥180,000  0.30 = ¥54,000.

87.

a

¥300,000 – ¥164,000 – ¥30,000 + ¥90,000 – ¥16,000 = ¥180,000; ¥180,000 – ¥54,000 = ¥126,000

88.

d

$1,800,000 – [($45,000 – $27,000) – (($45,000 – $27,000)  0.30)] = $1,787,400.

Income Statement and Related Information

No. Answer

4 - 31

Derivation

89.

a

$240,000 + $$370,000 + $226,000 = $836,000.

90.

a

$480,000 + $740,000 + $452,000 = $1,672,000.

91.

a

$37,500 – $11,250 = $26,250.

92.

b

$26,250 + ($750,000 × 0.70) = $551,250.

93.

c

$1,800,000 – $1,500,000 = $300,000.

94.

b

($1,000,000 – $250,000) ÷ 250,000 sh. = $3.00.

95.

d

$1,000,000 ÷ 400,000 sh. = $2.50.

96.

d

$350,000 ÷ 100,000 sh. = $3.50.

97.

c

($500,000 – $60,000) ÷ 125,000 = $3.52.

98.

c

($500,000 – $60,000) ÷ 250,000 = $1.76.

99.

b

(₤1,000,000 – ₤100,000) ÷ 150,000 = ₤6.00.

100.

d

($800,000 – X) ÷ 160,000 = $4.25. $800,000 – X = $680,000 = $120,000.

101.

a

(₤3,900,000 – ₤10,000 – ₤7,500) × 0.20 = ₤776,500.

102.

b

₤30,000 – (₤30,000  0.20) = ₤24,000.

103.

c

[(₤3,900,000 – ₤10,000 – ₤7,500)  0.20] + (₤30,000  0.20) = ₤782,500.

104.

c

$100,000 × 0.60 = $60,000.

105.

c

$300,000 × 0.60 = $180,000.

106.

b

($262,000 – $37,000 + $8,000) × 0.40 = $93,200.

107.

a

($377,000 + $23,000 + $6,000) × 0.30 = $121,800.

108.

a

($110,000 – $60,000 – $8,000 – $11,000 + $9,000 – $1,000 – $2,000) x 0.40 = $14,800.

109.

a

$2,500,000 – $430,000 = $2,070,000.

110.

b

$2,500,000 – $430,000 + $1,000,000 – $320,000 = $2,750,000.

111.

c

$1,200,000 + $215,000 = $1,415,000.

112.

d

$1,200,000 + $215,000 + $500,000 – $160,000 = $1,755,000.

4 - 32

Test Bank to accompany Intermediate Accounting: IFRS Edition

No. Answer

Derivation

113.

d

$1,900,000 – $800,000 – $200,000 + $75,000 = $975,000.

114.

d

$2,100,000 – $900,000 – $240,000 = $960,000.

115.

d

$2,100,000 – $900,000 – $240,000 – ($150,000  0.80) = $840,000.

116.

a

$850,000 + $150,000 – $50,000 + ($40,000  0.70) = $978,000.

117.

b

¥800,000 – (¥800,000  0.20) = ¥640,000.

118.

b

(¥800,000 – ¥600,000) = ¥200,000  0.80 = ¥160,000.

119.

a

¥600,000 – (¥600,000  0.20) = ¥480,000

120.

d

¥600,000 – (¥600,000  0.20) = ¥480,000

121.

d

Other comprehensive income = $30,000.

122.

a

$500,000 – $350,000 – $55,000 + $25,000 + $2,000 = $122,000.

123.

c

$10,000 – $2,000 = $8,000.

124.

c

$160,000 + $120,000 - $20,000 – $4,000 = $256,000.

125.

a

($160,000 + $120,000 – $20,000 – $4,000) + $80,000 + ($10,000 – $2,000) = $344,000.

Income Statement and Related Information

4 - 33

DERIVATIONS — CPA Adapted No. Answer

Derivation

126.

d

$100,000 + $75,000 + $110,000 + $90,000 = $375,000.

127.

a

$140,000 + $170,000 + $90,000 = $400,000.

128.

a

$160,000 + $80,000 + $110,000 + $170,000 = $520,000.

129.

a

$150,000 + $90,000 = $240,000.

130.

d

$60,000 + $70,000 – $80,000 = $50,000.

131.

c

$140,000 – $60,000 – $25,000 – $9,000 – $8,000 + $5,000 – $3,000 – $3,000 = $37,000.

132.

a

$17,000 × 0.70 = $11,900.

133.

b

$420,000 – $140,000 = $280,000.

134.

a

$105,000 + $60,000 + $90,000 = $255,000.

135.

b

Conceptual.

4 - 34

Test Bank to accompany Intermediate Accounting: IFRS Edition

EXERCISES Ex. 4-136—Definitions. Provide clear, concise answers for the following. 1. What are revenues? 2. What are expenses? 3. What are gains? 4. What are losses? 5. When does a discontinued operation occur? 6. Indicate how earnings per share is computed. 7. What is the primary category of prior period adjustments and how are they reported in the financial statements?

Solution 4-136 1. Revenues are increases in economic benefits during the period that arise from the ordinary activities of a company. 2. Expenses are decreases in economic benefits during the period that arise from the ordinary activities of a company. 3. Gains are increases in economic benefits that may or may not arise in the ordinary activities of a company. 4. Losses are decreases in economic benefits that may or may not arise in the ordinary activities of a company. 5. A discontinued operation occurs when (a) the results of operations and cash flows of a component of a company have been eliminated from the ongoing operations, and (b) there is no significant continuing involvement in that component after the disposal transaction. 6. The computation of earnings per share is: Net income minus preference dividends divided by the weighted average of ordinary shares outstanding. 7. Prior period adjustments include correction of an error in the financial statements of a prior period. Prior period adjustments (net of tax) should be debited or credited to the opening balance of retained earnings.

Income Statement and Related Information

4 - 35

Ex. 4-137—Terminology. In the space provided, write the word or phrase that is defined or indicated. 1. Net income minus preference dividends divided by the weighted average of ordinary shares outstanding.

1. ________________________________

2. All changes in equity during a period except those resulting from investments by owners and distributions to owners.

2. ________________________________

3. A correction of an error is reported as a

3. ________________________________

4. A change from one generally accepted principle to another.

4. ________________________________

5. The income statement category for a disposal of a component of a business.

5. ________________________________

6. Relating tax expense to specific items on the income statement.

6. ________________________________

Solution 4-137 1. 2. 3. 4. 5. 6.

Earnings per share. Comprehensive income. Prior period adjustment. Changes in accounting principle. Discontinued operations. Intraperiod tax allocation.

Ex. 4-138—Calculation of net income from the change in equity. Presented below is certain information pertaining to Edson Company. Assets, January 1 Assets, December 31 Liabilities, January 1 Share capital, December 31 Retained earnings, December 31 Ordinary shares sold during the year Dividends declared during the year Compute the net income for the year.

$240,000 230,000 160,000 80,000 31,000 10,000 13,000

4 - 36

Test Bank to accompany Intermediate Accounting: IFRS Edition

Solution 4-138 Assets Liabilities Equity

January 1 $240,000 160,000 $ 80,000

Computation of net income: Equity December 31 Equity January 1 Increase Add: Dividend declared Less: Ordinary shares sold Net income

December 31 $111,000*

$111,000 80,000 31,000 13,000 (10,000) $ 34,000

*$80,000 + $31,000

Ex. 4-139—Calculation of net income from the change in equity. Presented below are changes (in thousands) in the account balances of Wenn Company during the year, except for retained earnings. Increase Increase (Decrease) (Decrease) Cash ¥25,000 Accounts payable ¥34,000 Accounts receivable (net) (13,000) Bonds payable (20,000) Inventory 52,000 Share capital 72,000 Plant assets (net) 37,000 Share premium 16,000 The only entries in Retained Earnings were for net income and a dividend declaration of $10,000. Compute the net income for the current year. Solution 4-139 Computation of net income Change in assets (¥114,000 – ¥13,000) Change in liabilities (¥34,000 – ¥20,000) Change in equity Add: Dividend declared Less: Investment by shareholders Net income

¥101,000 14,000 87,000 10,000 (88,000) ¥ 9,000

Increase Increase Increase

Income Statement and Related Information

4 - 37

Ex. 4-140—Income measures. Presented below is information related to Watt Company in its first year of operation. The following information is provided at December 31, 2015, the end of its first year. Sales revenue €420,000 Cost of good sold 210,000 Selling and administrative expenses 75,000 Gain on sale of plant assets 45,000 Unrealized gain on non-trading securities 15,000 Financing costs 10,000 Loss on discontinued operations 20,000 Allocation to non-controlling interest 60,000 Dividends declared and paid 12,000 Compute the following (a) income from operations, (b) net income, (c) net income attributable to Watt Company shareholders, (d) comprehensive income, and (e) retained earnings balance at December 31, 2015. Solution 4-140 Sales revenue......................................................................................................... €420,000 Cost of goods sold.................................................................................................. 210,000 Gross profit............................................................................................................. 210,000 Selling and administrative expenses....................................................................... 75,000 Other income and expenses Gain on sale of plant assets.......................................................................... Income from operations.......................................................................................... Financing costs....................................................................................................... Income from continued operations.......................................................................... Loss on discontinued operations............................................................................ Net income............................................................................................................. Allocation to non-controlling interest....................................................................... Net income attributable to shareholders.................................................................

45,000 180,000(a) 10,000 170,000 (20,000) 150,000(b) 60,000 €90,000(c)

Net income............................................................................................................. €150,000 Unrealized gain on non-trading securities............................................................... 15,000 Comprehensive income.......................................................................................... €165,000(d) Net income............................................................................................................. €150,000 Dividends declared and paid.................................................................................. 12,000 Retained earning December 31, 2015.................................................................... €138,000(e)

4 - 38

Test Bank to accompany Intermediate Accounting: IFRS Edition

Ex. 4-141—Income Computations. Presented below is financial information related to Finney Company Revenue Income from continuing operations Comprehensive income Net income Income from operations Selling and administrative expenses Income before income tax

€950,000 120,000 140,000 100,000 260,000 600,000 250,000

Compute the following (a) other income and expense, (b) financing costs, (c) income tax, (d) discontinued operations, and (e) other comprehensive income. Solution 4-141 a. b. c. d. e.

Other income and expense = €950,000 – €600,000 – €260,000 = €90,000. Financing costs = €260,000 – €250,000 = €10,000. Income tax = €250,000 – €120,000 = €130,000. Discontinued operations = €120,000 – €100,000 = (€20,000). Other Comprehensive income = €140,000 – €100,000 = €40,000.

Ex. 4-142—Income statement classifications. Indicate the major section or subsection of an income statement in which each of the following items would usually appear: a. Advertising b. Depletion c. Dividend revenue d. Freight-in e. Loss on disposal of a component of the business, net of tax f. Income taxes on income g. Interest revenue h. Purchase discounts i. Sales discounts j. Officers' salaries k. Freight-out

Income Statement and Related Information

4 - 39

Solution 4-142 a. b. c. d. e. f. g. h. i. j. k.

Selling expense. Cost of goods sold. Other income and expense. Cost of goods sold as an addition to purchases. Discontinued operations. Income taxes; subtracted from income before income taxes in arriving at net income. Other income and expense. Cost of goods sold as a subtraction from purchases. Subtracted from gross revenues. Administrative or general expenses. Selling expense.

Ex. 4-143—Income statement relationships. Fill in the appropriate blanks for each of the independent situations below. Company A Company B Sales revenue (a) ¥_______ ¥343,400 Beginning inventory 52,600 (d) _______ Net purchases 175,300 255,600 Ending inventory 52,200 108,000 Cost of goods sold (b) _______ (e) _______ Gross profit 95,300 88,000 Operating expenses (c) _______ 50,000 Income before taxes 6,000 (f) _______ Solution 4-143 (a) ¥271,000 (b) ¥175,700 (c) ¥89,300

(d) ¥107,800 (e) ¥255,400 (f) ¥38,000

(g) ¥360,000 (h) ¥153,000 (i) ¥105,000

Company C ¥540,000 90,000 (g) _______ 63,000 387,000 (h) _______ 48,000 (i) _______

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Test Bank to accompany Intermediate Accounting: IFRS Edition

Ex. 4-144— Income statement. Listed below in scrambled order are 11 income statement categories. Use the numerals 1 through 11 to indicate the order in which these categories should appear on an income statement. (

)

Discontinued operations.

(

)

Cost of goods sold.

(

)

Other income and expense.

(

)

Net income.

(

)

Income taxes.

(

)

Sales.

(

)

Gross profit.

(

)

Income from operations.

(

)

Income before income taxes.

(

)

Selling and administrative expenses.

(

)

Income from continuing operations.

Solution 4-144 10, 2, 5, 11, 8, 1, 3, 6, 7, 4, 9

Income Statement and Related Information

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Ex. 4-145—Classification of income statement and retained earnings statement items. For each of the items listed below, indicate how it should be treated in the financial statements. Use the following letter code for your selections: a. Other income and expense item on the income statement b. Discontinued operations c. Prior period adjustment ______

1.

The company incurred a loss from impairment of plant assets.

______

2.

Obsolete inventory was written off. This was the first loss of this type in the company's history.

______

3.

Loss on the disposal of a component of the business.

______

4.

Recognition of income earned last year which was inadvertently omitted from last year's income statement.

______

5.

The company sold one of its warehouses at a loss.

______

6.

Settlement of litigation with federal government related to income taxes of three years ago. The company is continually involved in various adjustments with the federal government related to its taxes.

______

7.

Loss on sale of investments. The company last sold some of its investments two years ago.

______

8.

The company neglected to record its depreciation in the previous year.

______

9.

Discontinuance of all production in the United States. The manufacturing operations were relocated in Mexico.

Solution 4-145 1. a 2. a 3. b

4. c 5. a 6. a

7. a 8. c 9. a

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Test Bank to accompany Intermediate Accounting: IFRS Edition

PROBLEMS Pr. 4-146—Income statement. Presented below is information (in thousands) related to Chen Company. Retained earnings, December 31, 2014 Sales revenue Selling and administrative expenses Loss on disposal of component (pre-tax) Cash dividends declared on ordinary shares Cost of goods sold Gain resulting from computation error on depreciation charge in 2013 (pre-tax) Rent revenue Impairment loss Interest expense

¥ 650,000 1,400,000 240,000 260,000 33,600 830,000 520,000 120,000 90,000 10,000

Instructions Prepare in good form an income statement for the year 2015. Assume a 30% tax rate and that there were 70,000 ordinary shares outstanding during the year. Solution 4-146 Chen Company INCOME STATEMENT For the Year Ended December 31, 2015 Sales revenue Cost of goods sold Gross profit Selling and administrative expenses Other income and expense Impairment loss Income from operations Interest expense Income before taxes Income taxes Income from continuing operations Discontinued operations, net of applicable income taxes of ¥78,000 Net income Per share— Income from continuing operating Discontinued operations net of tax Net income

¥ 3.50 (2.60) ¥ 0.90

¥1,400,000 830,000 570,000 (240,000)_ 120,000 (90,000) 360,000 10,000 350,000 (105,000) 245,000 (182,000) ¥ 63,000

Income Statement and Related Information

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Pr. 4-147—Income statement form. Wilcox Corporation had income from continuing operations of $900,000 (after taxes) in 2015. In addition, the following information has not been considered. 1. A machine was sold for $140,000 cash during the year at a time when its book value was $110,000. (Depreciation has been properly recorded.) The company often sells machinery of this type. 2. Wilcox decided to discontinue its stereo division in 2015. During the current year, the loss on the disposal of this component of the business was $170,000 less applicable taxes. Instructions Present in good form the income statement of Wilcox Corporation for 2015 starting with "income from continuing operations." Assume that Wilcox's tax rate is 30% and 200,000 ordinary shares were outstanding during the year.

Solution 4-147 Wilcox Corporation Partial Income Statement For the Year Ended December 31, 2015 Income from continuing operations Discontinued operations Loss on disposal of a component of a business, $170,000, less applicable income taxes, $51,000 Net income Per share—Income from cont. operations Discontinued operations, net of tax Net income *Income from cont. operations (unadjusted) Gain on sale of machinery (after tax) Income from cont. operations (adjusted)

$921,000* (119,000) $802,000 $4.61 (0.60) $4.01 $900,000 21,000 $921,000

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Test Bank to accompany Intermediate Accounting: IFRS Edition

Pr. 4-148—Income statement. Shown below is an income statement for 2015 that was prepared by a poorly trained bookkeeper of Howell Corporation. Howell Corporation INCOME STATEMENT December 31, 2015 Sales revenue Interest revenue Cost of merchandise sold Selling expenses Administrative expense Interest expense Income before special item Special item Loss on disposal of a component of the business Net income tax liability Net income

$895,000 19,500 (408,500) (145,000) (215,000) (13,000) 133,000 (40,000) (27,900) $65,100

Instructions Prepare an income statement for 2015 for Howell Corporation that is presented in accordance with IFRS (including format and terminology). Howell Corporation has 50,000 ordinary shares outstanding and has a 30% income tax rate on all tax related items. Round all earnings per share figures to the nearest cent.

Solution 4-148 Howell Corporation INCOME STATEMENT For the Year Ended December 31, 2015 Sales Cost of goods sold Gross profit Selling expenses $145,000 Administrative expenses 215,000 Other income: Interest revenue Income from operations Interest expense Income before income taxes Income taxes Income from continuing operations Loss from discontinued operations, net of applicable income tax of $12,000 Net income

$895,000 408,500 486,500 360,000 19,500 146,000 13,000 133,000 39,900 93,100 28,000 $65,100

Income Statement and Related Information

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Solution 4-148 (cont.) Per share Income from continuing operations Discontinued operations loss net of tax Net income

$1.86 (0.56) $1.30

Pr. 4-149—Income statement. Presented below is an income statement for Kinder Company for the year ended December 31, 2015. Kinder Company Income Statement For the Year Ended December 31, 2015 Net sales Costs and expenses: Cost of goods sold Selling, general, and administrative expenses Other, net Income before income taxes Income taxes Net income

$850,000 640,000 70,000 20,000

730,000 120,000 36,000 $ 84,000

Additional information: 1. "Selling, general, and administrative expenses" included a charge of $7,000 for impairment of intangibles. 2. "Other, net" consisted of interest expense, $5,000, and a discontinued operations loss of $15,000 before taxes. If the loss had not occurred, income taxes for 2015 would have been $40,500 instead of $36,000. 3. Kinder had 20,000 ordinary shares outstanding during 2015. Instructions Prepare a corrected income statement, including the appropriate per share disclosures.

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Test Bank to accompany Intermediate Accounting: IFRS Edition

Solution 4-149 Kinder Company Income Statement For the Year Ended December 31, 2015 Net sales Cost of goods sold Gross profit Selling, general, and administrative expenses Other income and expense Loss on impairment Income from operations Interest expense Income before taxes Income taxes Income from continuing operations Discontinued operations Loss on disposal of component Less applicable taxes Net income Per share— Income from continuing operations Discontinued operations, net of tax Net income

$850,000 640,000 $210,000 63,000 7,000 140,000 5,000 135,000 40,500 94,500 15,000 4,500

$4.73 (0.53) $4.20

10,500 $ 84,000

Income Statement and Related Information

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Pr. 4-150—Income statement and retained earnings statement. Wang Corporation's capital structure consists of 40,000 ordinary shares. At December 31, 2015 an analysis of the accounts and discussions with company officials revealed the following information: Sales Purchase discounts Purchases Loss on discontinued operations (net of tax) Selling expenses Cash Accounts receivable Share capital Accumulated depreciation Dividend revenue Inventory, January 1, 2015 Inventory, December 31, 2015 Unearned service revenue Accrued interest payable Land Patents Retained earnings, January 1, 2015 Interest expense General and administrative expenses Dividends declared Allowance for doubtful accounts Notes payable (maturity 7/1/18) Machinery and equipment Materials and supplies Accounts payable

¥1,050,000 18,000 642,000 28,000 128,000 60,000 90,000 200,000 180,000 8,000 152,000 125,000 4,400 1,000 370,000 100,000 290,000 17,000 150,000 29,000 5,000 200,000 450,000 40,000 60,000

The amount of income taxes applicable to ordinary income was ¥33,600, excluding the tax effect of the discontinued operations loss which amounted to ¥12,000. Instructions (a) Prepare an income statement. (b) Prepare a retained earnings statement.

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Test Bank to accompany Intermediate Accounting: IFRS Edition

Solution 4-150 WANG CORPORATION Income Statement For the Year Ended December 31, 2015 Sales Cost of goods sold: Merchandise inventory, Jan. 1 Purchases Less purchase discounts Net purchases Merchandise available for sale Less merchandise inv., Dec. 31 Cost of goods sold

¥1,050,000 ¥152,000 ¥642,000 18,000

Gross profit Selling expenses General and administrative expenses Other income and expense: Dividend revenue Income from operations Interest expense Income before income taxes Income taxes Income from continuing operations Discontinued operations Loss on disposal, less applicable taxes of $12,000 Net income Per share of share capital— Income from continuing operations Discontinued operations, Net income

624,000 776,000 125,000 651,000 399,000 128,000 150,000

278,000 8,000 129,000 17,000 112,000 33,600 78,400 ¥

28,000 50,400

¥1.96 (0.70) ¥1.26

WANG CORPORATION Retained Earnings Statement For the Year Ended December 31, 2015 Retained earnings, January 1, 2015 Add: Net income Deduct: Dividends declared Retained earnings, December 31, 2015

¥290,000 ¥50,400 29,000

21,400 ¥311,400

Income Statement and Related Information

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Pr. 4-151—Irregular items and financial statements. The accountant preparing the income statement for Bakersfield, Inc. had some doubts about the appropriate accounting treatment of the six items listed below during the fiscal year ending December 31, 2015. Assume a tax rate of 40 percent. 1.

The corporation disposed of its sporting goods division during 2015. This disposal meets the criteria for discontinued operations. The division correctly calculated income from operating this division of $150,000 before taxes and a loss of $20,000 before taxes on the disposal of the division. All of these events occurred in 2015 and have not been recorded.

2.

The company recorded advances of $15,000 to employees made December 31, 2015 as Salaries and Wages Expense.

3.

Dividends of $10,000 during 2015 were recorded as an operating expense.

4.

In 2015, Bakersfield changed its method of accounting for inventory from the first-in firstout method to the average cost method. Inventory in 2015 was correctly recorded using the average cost method. The new inventory method would have resulted in an additional $125,000 of cost of goods sold (before taxes) being reported on prior years' income statement.

5.

Office equipment purchased January 1, 2015 for $60,000 was incorrectly charged to Supplies Expense at the time of purchase. The office equipment has an estimated threeyear service life with no expected residual value. Bakersfield uses the straight-line method to depreciate office equipment for financial reporting purposes. This error has not been corrected.

6.

On January 1, 2011, Bakersfield bought a building that cost $85,000, had an estimated useful life of ten years, and had a residual value of $5,000. Bakersfield uses the straight-line depreciation method to depreciate the building. In 2015, it was estimated that the remaining useful life was eight years and the residual value was zero. Depreciation expense reported on the 2015 income statement was correctly calculated based on the new estimates. No adjustment for prior years' depreciation estimates was made. Part A. For each item, indicate corrections to income from continuing operations before taxes, if any. Denote any negative numbers by using brackets < >.

Test Bank to accompany Intermediate Accounting: IFRS Edition

4 - 50

Solution 4-151 Number Item

Description

Increase to Income from Continuing Operations

1.

Discontinued Items reported after Income from Continuing Operations

No Effect

2.

Correct with Dr: Advances to Employees

$15,000

Cr: Salaries and Wages Expense 3.

Dividends are not reported on the Income Statement; should be on Statement of R/E.

$10,000

4.

Change in inventory method: Current year reported correctly on income statement, need to adjust beginning R/E.

No Effect

5.

To correct, need to put all $60,000 into Equipment account and take out of Supplies Expense account. Also take depreciation of $20,000 for the year. Net effect is to increase income by $40,000.

$40,000

6.

Current year is correct. Change in estimate does not need retroactive action.

No Effect

Income Statement and Related Information

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Part B. At January 1, 2015, Bakersfield, Inc.'s retained earnings balance was $200,000. Assume that income before income tax and after correctly considering any of the six additional items in Part A was $1,000,000. Prepare the income statement and retained earnings statement. Denote negative numbers by using brackets < >. Do not disclose earnings per share data. BAKERSFIELD INCORPORATED Partial Income Statement For the Year Ending December 31, 2015 Income before income tax

$1,000,000

Income tax ($1,000,000 × 40%) Income from continuing operations

600,000

Discontinued operations Income from discontinued operations net of tax

90,000

($150,000 × 60%) Loss on disposal of discontinued operation net of tax



($20,000 × 60%) Net income

$678,000 BAKERSFIELD INCORPORATED Retained Earnings Statement For the Year Ending December 31, 2015

Beginning Retained earnings as of January 1, 2015 Adjustment for change in inventory method

$200,000

($125,000 × 60%) Beginning Retained earnings as adjusted

125,000

Add: Net Income

678,000

Less: Dividends



Ending Retained earnings

$793,000

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Test Bank to accompany Intermediate Accounting: IFRS Edition

Short Answer: 1. What are IFRS requirements with respect to expense classification? 1. Under IFRS expenses must be classified by either nature or function. Classification by nature leads to descriptions such as the following: salaries, depreciation expense, utilities expense and so on. Classification by function leads to descriptions like administration, distribution, and manufacturing. Disclosure by nature is required in the notes to the financial statements if the functional expense method is used on the income statement. There is no U.S. GAAP in this area, except the SEC does require public companies to report their expenses by function. 2. Bradshaw Company experienced a loss that was deemed to be both unusual in nature and infrequent in occurrence. How should Bradshaw report this item in accordance with IFRS? 2. Bradshaw should report this item similar to other unusual gains and losses. While under U.S. GAAP, companies are required to report an item as extraordinary if it is unusual in nature and infrequent in occurrence, extraordinary item reporting is prohibited under IFRS.